How to Gamble on the Elections

Every four years, there is a competition that tests the will, strength, and ability of its participants. While the Olympics invite everyone around the world to compete, this competition is reserved only for U.S. citizens. This is the presidential election, and soon, you may be able to legally invest in the election outcomes.

$100 on Four More YearsOn Dec. 19, Nadex, the North American Derivatives Exchange, filed to offer tradable options on major presidential candidates and party control of the U.S. House and U.S. Senate. This means that an investor can buy something called binary options that pay $100 if you choose the winning candidate or party correctly. If you do not choose correctly, the option is worth $0.

This type of exchange that bets on future events, called a prediction market, is not new. The University of Iowa started the Iowa Electronic Markets to help make predictions since the 1988 presidential election. The Iowa market is unregulated but maintains legal status because of its purpose as a research and teaching tool, and its trading account limit of $500. There are also overseas markets, like Intrade in Ireland, where bets can be made on everything from U.S. politics to the amount of arctic ice that will be left by the end of 2012. But according to the Wall Street Journal, Nadex will be the first political market traded on a regulated U.S. exchange.

Entertainment or investment?This turns U.S. politics into a horse race that you can bet on, but should an investor bother with putting money down on, say, Dukakis winning? While a few dollars on a candidate could be as entertaining as a game of craps, I believe there are much better bets based on politics elsewhere, with the advantage of unlimited upsides.

For example, betting on legislation to allow online gambling would boost the growth prospects of MGM Resorts (NYS: MGM) , Boyd Gaming (NYS: BYD) , and Wynn Resorts (NAS: WYNN) , as well as online game provider Perfect World (NAS: PWRD) -- although as Fool colleague Travis Hoium writes, Congress failed to push gaming legislation forward this year. However, the Justice Department just made public their new stance on the 1961 Wire Act, which now allows non-sport intrastate gambling. While not explicitly legalizing other forms of online gambling, it's a step toward loosening regulations.

And, I'd bet the cash-strapped governments would be happy to take in the estimated $42 billion in related online gambling taxes over 10 years, while the industry would enjoy the legalization of the U.S. online gambling market that Goldman Sachs estimates to be worth as much as $12 billion a year. This could boost the expected 42% growth in worldwide online gaming in 2012. The only major gaming CEO sitting out is Las Vegas Sands' (NYS: LVS) Sheldon Adelson, who fears that underage gambling would be difficult to police online. Las Vegas Sands' has shown itself to be an international gaming dynamo, with locations in Macau and Singapore raking in the cash. Perhaps with their massive earnings from these locations, they don't feel the same pressure to capitalize off online gaming as their industry cohorts.